Rogers Communications: Blue Chip or Vulnerable From Wireless?

On Monday, Rogers Communications Inc. (RCI) saw its shares drop 6% on premature fears that lower-than-expected fourth quarter wireless subscriber numbers would affect the company's profitability. But one analyst sees a silver lining.

In a research note, RBC Capital Markets analyst Jonathan Allen said Rogers' constant stream of positive results is turning the company into the holy grail of investing – a blue-chip stock.

Mr. Allen, who maintained a 'Top Pick" rating and C$60 price target on the stock wrote:

Rogers is transforming from a perceived high-risk/high-leverage company into a blue-chip stock: consistent profitability, falling debt leverage and has the potential to return capital.

RCI debt is now investment grade, debt spreads are currently second lowest in Canadian telecom, and the shares offer an attractive 2% dividend – with buybacks – and room to grow.

Although the net subscriber adds in Rogers' highly profitable wireless business were lower than analysts expected, Mr. Allen still believes the business is in strong shape.

Mr. Allen wrote:

Our channel checks showed a more equitable share of wireless gross adds were driven by cut-rate offers/discounting from Telus and Bell Mobility, and fewer new handsets from Rogers, which should be positive for Rogers' Q4 financial results and also positive in terms of industry competitive dynamics.

But not all analysts were bullish on Rogers following Monday's 2008 guidance announcement.

Canaccord Adams analyst David Lambert says that in order to avoid Bell (BCE) and Telus (TU) snapping up wireless market share, the company needs to find ways to boost its subscriber growth and postpaid average revenue per user numbers.

"We believe Rogers could require 50% wireless data revenue growth without voice erosion to achieve this guidance, an aggressive goal," said Mr. Lambert, who maintains a sell rating and a C$38 price target on the stock.